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Question 1 You are provided with five possible portfolios to select. The portfolios are made up of a combination of three assets: Share A, Share
Question 1 | ||||||||
You are provided with five possible portfolios to select. The portfolios are made up of a combination of three assets: Share A, Share B, and REIT A. | ||||||||
The weightings of each asset per portfolio are shown in Table 1. | ||||||||
A portfolio risk and return calculator is provided for you to calculate the portfolio return, portfolio standard deviation, and standard deviation of the portfolio's excess return given a specific portfolio weighting. | ||||||||
Table 1: Potential portfolio investments. | ||||||||
Portfolio 1 | Portfolio 2 | Portfolio 3 | Portfolio 4 | Portfolio 5 | ||||
Share A | 58% | 40% | 26% | 67% | 100% | |||
Share B | 20% | 45% | 74% | 15% | 0% | |||
REIT A | 22% | 15% | 0% | 18% | 0% | |||
Portfolio risk and return calculator | ||||||||
Return | Standard deviation of return | Standard deviation of excess return | Weight | |||||
Share A | 16% | 10% | 10% | |||||
Share B | 22% | 16% | 16% | |||||
REIT A | 18% | 12% | 11% | |||||
0% | Should always sum to 100% | |||||||
Portfolio return | 0.00% | |||||||
Portfolio standard deviation | 0.00% | |||||||
Standard deviation of portfolio's excess return | 0.00% | |||||||
Use the asset weightings provided in Table 1 and the portfolio risk and return calculator above to calculate the following: | ||||||||
> | Portfolio return (rounded to the nearest two decimal places) | |||||||
> | Portfolio standard deviation (rounded to the nearest two decimal places) | |||||||
> | Standard deviation of portfolio's excess return (rounded to two decimal places) | |||||||
For example, include the asset weights provided in Table 1 for Portfolio 1 in the grey blocks in the portfolio risk and return calculator. | ||||||||
The portfolio return, portfolio standard deviation, and standard deviation of portfolio's excess return for Portfolio 1 will be calculated automatically in the blue blocks. | ||||||||
Enter the answers that appear in the blue blocks for Portfolio 1 in the grey blocks in the table below. Repeat for each of the other portfolios. | ||||||||
Portfolio 1 | Portfolio 2 | Portfolio 3 | Portfolio 4 | Portfolio 5 | ||||
Portfolio return | ||||||||
Portfolio standard deviation | ||||||||
Standard deviation of portfolio's excess return | ||||||||
Using your calculations in Question 1.1, calculate the Sharpe ratio for each portfolio, assuming a risk-free rate of 2.6%. | ||||||||
Portfolio 1 | Portfolio 2 | Portfolio 3 | Portfolio 4 | Portfolio 5 | ||||
Portfolio return | ||||||||
Risk-free rate | ||||||||
Standard deviation of portfolio's excess return | ||||||||
Sharpe ratio | ||||||||
Assume that you are a rational investor (i.e. you wish to maximise your return at a given risk level). | ||||||||
Based on the calculations you performed in Question 1.2, which of the five portfolios would you choose to invest in and why? | ||||||||
Limit your answer to 20 words. | ||||||||
Start writing here: | ||||||||
Based on the calculations you performed in Question 1.2: | ||||||||
1.4.1 | Which portfolio has the lowest Sharpe ratio? Insert the portfolio number into the grey block alongside. | |||||||
1.4.2 | Why do you think the portfolio you identified in 1.4.1 has the lowest Sharpe ratio? Limit your answer to 20 words. | |||||||
Start writing here: | ||||||||
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